Is There An Opportunity With SECURE Waste Infrastructure Corp.'s (TSE:SES) 26% Undervaluation?

February 17, 2025

Key Insights

SECURE Waste Infrastructure's estimated fair value is CA$19.86 based on 2 Stage Free Cash Flow to Equity
SECURE Waste Infrastructure's CA$14.71 share price signals that it might be 26% undervalued
The CA$18.63 analyst price target for SES is 6.2% less than our estimate of fair value

In this article we are going to estimate the intrinsic value of SECURE Waste Infrastructure Corp. (TSE:SES) by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for SECURE Waste Infrastructure

What's The Estimated Valuation?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2025202620272028202920302031203220332034 Levered FCF (CA$, Millions) CA$246.4mCA$309.5mCA$243.0mCA$243.6mCA$245.8mCA$249.1mCA$253.1mCA$257.8mCA$263.0mCA$268.6mGrowth Rate Estimate SourceAnalyst x5Analyst x4Analyst x1Est @ 0.26%Est @ 0.89%Est @ 1.33%Est @ 1.64%Est @ 1.86%Est @ 2.01%Est @ 2.11% Present Value (CA$, Millions) Discounted @ 7.2% CA$230CA$269CA$197CA$185CA$174CA$164CA$156CA$148CA$141CA$134

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$1.8b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.4%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.2%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CA$269m× (1 + 2.4%) ÷ (7.2%– 2.4%) = CA$5.7b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$5.7b÷ ( 1 + 7.2%)¹⁰= CA$2.8b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is CA$4.6b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CA$14.7, the company appears a touch undervalued at a 26% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf — TSX:SES Discounted Cash Flow February 17th 2025

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at SECURE Waste Infrastructure as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.2%, which is based on a levered beta of 1.115. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for SECURE Waste Infrastructure

Strength

Earnings growth over the past year exceeded the industry.

Debt is not viewed as a risk.

Dividends are covered by earnings and cash flows.

Dividend information for SES.

Weakness

Dividend is low compared to the top 25% of dividend payers in the Oil and Gas market.

Opportunity

Good value based on P/E ratio and estimated fair value.

Threat

Annual earnings are forecast to decline for the next 4 years.

What else are analysts forecasting for SES?

Looking Ahead:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price sitting below the intrinsic value? For SECURE Waste Infrastructure, there are three fundamental elements you should look at:

Risks: Take risks, for example - SECURE Waste Infrastructure has 3 warning signs (and 2 which are potentially serious) we think you should know about.
Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for SES's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TSX every day. If you want to find the calculation for other stocks just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.